Ballard Power Systems (TSX:BLDP) Q2 2020 Earnings Call

0:00 Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems second quarter 2020 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Guy Macri, Director of Investor Relations. Please go ahead. Welcome to Ballard's second quarter 2020 Financial and Operating Results Conference Call.

0:48 With us today on the call, we've got Randy McEwen, Ballard's President and CEO, and Tony Guggemann, our CFO. will be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results can be materially different. Please refer to our most recent annual information form and other public filings for a complete disclaimer and related information. Before we get started, I'd like to remind everyone that we're planning a Virtual Investor and Analyst Day 2020 on Tuesday, September 29th this year. Basic information regarding that event is now available on our website, and we'll be adding dial-in information in the coming weeks to enable interested investors to participate in this live video stream day, which is set to kick off at 10 a.m. Eastern Time on the 29th of September.

1:36 On today's conference call, Randy's going to provide a business update, and Tony will then review second quarter 2020 financials, followed by a Q&A session. And I'll turn the call over to Randy. Thanks, Guy, and welcome everyone to today's conference call. On our second quarter financial results, Ballard delivered top-line revenue of $25.8 million, gross margin was 21%, adjusted EBITDA was negative $8.6 million, and we finished the second quarter with $170.3 million in cash reserves. Results were consistent with our expectations, reflecting some modest impact as a result of COVID-19. Consistent with the revenue cadence of the past few years, we expect a strong second half.

2:22 Although we've seen some delays in certain programs and activities during the past quarter as a result of COVID-19, and although order intake has slowed during the pandemic, conversely, we've recently seen a significant increase in quoting activity, with the quality of opportunities improving and project sizes increasing. Indeed, our sales pipeline has grown almost 50% in 2020 compared to the end of 2019, with most of that growth coming in the past few months. I want to repeat this point. During the pandemic, our sales pipeline is at record highs, up almost 50% over the past few months, with quoting activities particularly high across our heavy-duty motive segments of bus, commercial truck, rail, and marine.

3:10 Now, as noted on our last earnings call in the context of the COVID-19 pandemic, our top priority remains the health and safety of our employees, contractors, customers, and partners. We continue to comply with the most conservative public health guidelines, including having most employees working remotely and implementing precautionary and prudent measures at our facilities globally. We've preserved business continuity to align with our customer deliverables, including continued operations at our essential manufacturing and testing operations in Vancouver, as well as essential field service support to customers in China, Europe, and North America. On the supply chain side, we experienced some modest impacts in Q2, but have worked to mitigate overall 2020 risk, including by increasing our inventory positions in key materials.

4:03 Although the situation remains fluid, we're not expecting any major supply chain disruptions for the remainder of 2020. On the demand side, while we continue to experience some modest delays in customer projects, programs, and order intake, we believe the overall COVID-19 context will represent long-term demand acceleration as I described in a recent blog posted on our website. There have been several important policy and commercial developments in our target geographic markets since our last earnings call. I want to review these for you. Let me first start with Europe, where momentum continues to build. On May 27th, the European Commission proposed its 750 billion euro economic recovery plan with the Green Deal at its core.

4:53 The plan puts a focus on kick-starting a clean hydrogen economy with renewable hydrogen, cleaner transport, and logistics as key elements. On July 8th, the European Commission released a plan entitled A Hydrogen Strategy for Climate-Neutral Europe. which cemented hydrogen as a key priority to achieve the European Green Deal and a clean energy transition. The plan sets out a phased approach to develop renewable hydrogen. In the first phase from 2020 up to 2024, the strategic objective is to install at least six gigawatts of renewable hydrogen electrolyzers in the EU and the production of up to one million tons of renewable hydrogen to decarbonize existing hydrogen production and facilitate the uptake of hydrogen fuel cell buses and heavy trucks.

5:46 In the second phase from 2025 to 2030, the strategy is for hydrogen to become an intrinsic part of an integrated energy system with strategic objective to install at least 40 gigawatts of renewable hydrogen electrolyzers and the production of up to 10 million tons of renewable hydrogen. In this phase, renewable hydrogen is expected to gradually become cost-competitive with other forms of hydrogen production, and the plan calls for parallel demand-side policies to support scaling of trucks, rail, and maritime transport applications, along with a build-out of a network of hydrogen refueling stations. In the third phase, from 2030 onwards and towards 2050, Renewable hydrogen technologies should reach maturity and be deployed at large scale to reach all hard to decarbonize sectors.

6:40 The European Commission expects investments over the next decade to 2030 could range between 24 billion and 42 billion euros for electrolyzers, 220 to 340 billion euros for scaling up solar and wind energy production capacity, and 65 billion euros for hydrogen transport, distribution and storage, and hydrogen refueling stations. And we can now add Germany, Norway and Spain to the growing list of countries that have announced hydrogen strategy roadmaps, with each of these countries recently unveiling their respective national hydrogen strategies. Germany announced its national hydrogen strategy with 38 measures across the hydrogen value chain, including fuel cell vehicles.

7:27 Germany also announced a massive COVID-19 stimulus package, including 9 billion euros earmarked for green hydrogen and a commitment to 5 gigawatts of green electrolyzer capacity by 2030, with a further 5 gigawatts by 2040. Norway's strategy has a focus on the maritime sector, heavy transport and industrial processes as the most relevant uses for hydrogen. And in July, Spain announced its hydrogen roadmap, and 8.9 billion euro plan through 2030 with 57 specific measures and specific goals for 2030. There's also a growing call in the UK for a comprehensive hydrogen strategy, including for fuel cell electric vehicles, particularly targeting zero emission bus fleets and strategies for decarbonizing heavy goods vehicles, shipping, rail and aviation.

8:23 As an example, please see the recent report entitled, Driving Change, How Hydrogen Can Fuel a Transport Revolution, prepared by the Center for Policy Studies. During the quarter, Ballard received follow-on orders from Wright Bus, a long-time bus OEM partner, for 15 additional modules to power buses planned for deployment in the UK. At the present time, we have orders on hand from Wright Bus for a total of 50 modules to power UK buses in London, Aberdeen, and other cities. So Ballard is well positioned in the European market where we are currently powering 65 fuel cell electric buses in Europe with aggregate mileage of over 7 million kilometers. Let me now turn to the United States. In California on June 25th, the California Air Resources Board passed its landmark Advanced Clean Truck Regulation requiring truck manufacturers to transition from diesel trucks to electric zero emission trucks with a plan for every new truck sold in California to be zero emission by 2045.

9:28 Manufactures through certified medium and heavy duty chassis or complete vehicles with combustion engines are now required to sell zero emission trucks as an increasing percentage of their annual sales in California starting in model year 2024. For 2024, 9% of all on-road class 4-8 truck sales must be zero emission. incrementally scaling up to 50% for 2030 and 75% for 2035. Similarly, for Class 7-8 tractors, the requirements are 5% for 2024, 30% for 2030, and 40% for 2035. And in the past few weeks, 15 states including California, New York, New Jersey, Massachusetts, North Carolina, and Pennsylvania have signed an MOU committing them all to mandating that 30% of heavy and medium duty trucks sold must be zero emission by 2030, with all heavy and medium duty truck sales being zero emission by 2050.

10:33 So momentum is now building throughout the U.S. for decarbonizing commercial trucks. There was also important progress in California over the past few months on the zero-emission bus front. Several California transit agencies, including Orange County, AC Transit, and Sunline, published zero-emission bus rollout plans in compliance with car regulations, with many of these plans expecting to use fuel cell electric buses going forward. For example, in June, Okta, which operates more than 500 buses serving a population of approximately 3 million people, unveiled its zero emission bus rollout plan. In its plan, Okta noted that 100% fuel cell electric bus fleet scenario showed a lower overall cost than a mixed fleet scenario and then fuel cell battery buses on a standalone basis. And that fuel cell electric buses offered extended range and a better match to their operating parameters.

11:35 By comparison, Okta noted that many routes cannot be effectively served by battery electric buses without mid-route charging, and that the current range of battery electric buses may require more vehicles and drivers than fuel cell electric buses to meet similar service levels. The plan also noted that a 100% fuel cell electric bus scenario more closely approximates the current CNG bus range, CNG bus operations, and current CNG business-as-usual scenario. Based on the results of their analysis, Okta Zero Emission Bus Rollout Plan focuses on using 100% fuel cell electric buses for fixed route operations. In California, Ballard is now powering 37 fuel cell electric buses with cumulative mileage of over 2 million kilometers.

12:24 And now let's turn to the large China market. First, I'm pleased to confirm that the Weichai-Ballard joint venture has now begun production activities. together with assembly of next-generation LCS fuel cell stacks and LCS-based modules. We expect all manufacturing and assembly processes to be optimized and the start of a production ramp through the remainder of this year. For Ballard, this has been something of a soft launch given the travel and social distancing restrictions resulting from COVID-19. However, we anticipate a more formal opening ceremony at a future date to celebrate the commissioning of this important operation. As a reminder, the joint venture is located in the city of Weifeng in Shandong Province and is housed in a newly constructed 19,200 square meter facility currently staffed with approximately 130 employees.

13:24 This is an exciting step forward in our partnership strategy with Weichai and our supply of fuel cell products for buses, commercial trucks, and forklifts in the China market. In parallel with the work of the joint venture, Weichai has built four hydrogen refueling stations, or HRSs, in Shandong Province to support seven fuel cell electric bus lines with a total of over 200 fuel cell electric buses that have already traveled more than 1.2 million kilometers to date. There's also work currently underway to develop a series of fuel cell electric vehicles for the China market, including four fuel cell bus models two heavy-duty fuel cell truck models, and two logistics truck models, all of which are being developed at Weichai's OEM subsidiaries, Zhongtong Bus, Asia Star, and Sinotruck.

14:13 Of course, these subsidiaries, along with Weichai's extensive network of third-party bus and truck OEM customers, provides significant market opportunities for the sale of fuel cell modules and stacks to power the growing range of fuel cell electric vehicles expected to be deployed in China in the coming years. So we're very excited with our initial progress with Weichai in the large China bus and truck markets. We're also excited about continued progress at the Synergy Ballard joint venture in Guangdong Province, in which Ballard holds a 10% ownership interest. As a reminder, that JV is manufacturing Ballard's previous generation FC Velocity 9SSL fuel cell stacks. Subsequent to the quarter, we received a follow-on order for $7.7 million of MEAs from this joint venture, given growing market demand.

15:07 On the China policy front, we're still awaiting the release of the updated national policy on hydrogen and fuel cells, which has been delayed. It is now expected this quarter. There has, however, been continued progress on the provincial and local levels. On June 24, Shandong Province released the Medium and Long-Term Development Plan for the Hydrogen Energy Industry in Shandong Province 2020-2030, by which the province targets the adoption of 3,000 fuel cell electric vehicles and 30 HRSs by 2022, 10,000 fuel cell electric vehicles and 100 HRSs by 2025, and 50,000 fuel cell electric vehicles and 200 HRSs by 2030. and Shendow City in Shandong Province has also committed to a significant hydrogen and fuel cell electric vehicle plans, including 2,000 fuel cell electric vehicles, 10 fuel cell bus lines, and 25 HRSs by 2025, and 8,000 fuel cell electric vehicles, 30 fuel cell bus lines, two fuel cell tram lines, and 50 HRSs by 2030.

16:17 and during the second quarter Guangzhou City with a population of 11 million people released its Hydrogen Energy Industry Development Plan 2019-2030. This is an aggressive plan that sets 2030 targets including for fuel cell electric vehicles to account for at least 30% of public transport and sanitation vehicles and more than 100 HRSs. In terms of metrics in China, including fuel deployments, there are approximately 3,200 commercial trucks and buses with Ballard fuel cell technology currently operating in China. To date, these vehicles have traveled an estimated 40 million kilometers on China's roads, with vehicles monitored by Ballard delivering approximately 98% fuel cell availability in the first half of the year.

17:06 We're also continuing to power the world's first fuel cell tram line that went into service on the Gaoming Line in the city of Foshan, Guangdong Province. These five trams have now accumulated over 50,000 kilometers of service. To accommodate the growing number of fuel cell electric vehicles operating in China, we estimate today there are now 52 hydrogen fueling stations in service and an additional 50 under construction. I would like to note as well that earlier this week we announced that fuel cell electric vehicles powered by Ballard have now cumulatively traveled over 50 million kilometers, an industry-leading indicator of durability and performance, and enough to circle the globe 1,250 times.

17:53 As noted earlier by Guy, we're planning our Virtual Investor and Analyst Day 2020 on September 29th. We're looking forward to this event where we'll have more time to provide you with enhanced visibility on our corporate strategy, updates on progress against our key markets and our towns, our unique selling proposition and sustainable competitive advantages, our current and planned value chain positioning, our technology and product roadmap and cost down plans, our progress on the implementation of advanced manufacturing here in Vancouver, Progress at the Waychai Ballard Joint Venture and progress in our ESG initiatives. This will be an exciting day and we look forward to having the opportunity to hear from our senior leadership team on the impressive work that Ballard's doing to build an attractive business. And with that, I'll turn the call over to Tony to briefly review the Q2 financials.

18:50 Thanks, Randy, and good morning, everyone. Top line revenue in the second quarter was $25.8 million, up 9% year-over-year. In the quarter, power products revenue was up 62%, driven by heavy-duty motive, which was up $6.1 million to $12.5 million. This was due primarily to higher shipments of fuel cell products to China. And just a reminder, too, on the treatment of revenue from sales to our Wage by Ballard joint venture in China, in which we have a 49% interest. We recognize 51% of the revenue upon shipment of products by Ballard to the joint venture, while the remaining 49% is only recognized when the JV sells and ships products to its end customers in China.

19:42 As of the end of Q2 this year, 16.3 million dollars of revenue associated with product shipments to the JV in relation to the 44 million dollar order placed in May of 2019 has yet to be recognized. In addition, 2.1 million dollars of MEA revenue related to the 19.2 million dollar order received in December 2019 has also yet to be recognized. We expect this total of 18.4 million dollars in revenue to be recognized as the associated products are sold and shipped by the joint venture to its customers. Turning to technology solutions, the decline in TS revenue to $9.8 million in Q2 was due primarily to decreases in revenue from the Audi program, the technology transfer program with our wage by Ballard JV, and from the development program with Siemens. Now this decline reflects both a reduction in the scope of certain programs given the planned completion of some activities, as well as the impact of customer requested program changes and deferrals resulting from COVID-19, which included the impact of COVID-19 travel restrictions.

20:57 As a result, we expect full year revenue for technology solutions to be down on a year-over-year basis. Gross margin was 21% in Q2, down two points year-over-year, This decline was largely the result of the shift in product and service revenue, including the lower TS revenue. Cash operating costs increased 38% year over year to $11.6 million. This was primarily attributable to increased expenditures in technology and product development work related to our next generation stacks and modules for the bus, truck, train, and marine markets. Adjusted EBITDA in Q2 was negative $8.6 million, a decrease of $3.6 million compared to the same quarter last year.

21:47 This also included Ballard's $2.9 million share of losses related to the Whateye-Ballard joint venture. Ballard's net loss in Q2 was a negative $11.4 million compared to negative $7 million in Q2 last year, and earnings per share was negative 5 cents in Q2 compared to negative three cents in Q2 2019. And both the net loss and EPS numbers include the same Ballard share of losses from the wage I Ballard JV. Cash used by operating activities was $14.8 million in Q2 consisting of cash operating losses of $5.3 million and working capital outflows of $9.5 million. The change in working capital was largely due to higher accounts receivable related to timing inventory, and as Randy mentioned, higher inventories in anticipation of shipments in the second half of the year.

22:44 In terms of liquidity, during Q2, we generated additional net proceeds of $12.2 million from the ATM program we launched in Q1, ending Q2 with cash reserves of $170.3 million and no debt. We ended Q2 with an order backlog of $155.5 million and a 12-month order book of $101 million, down slightly from Q1 as a result of lower order intake in the quarter due to COVID-19. And lastly, I wanted to add that during the quarter, we rang the opening bell on the NASDAQ Stock Exchange, virtually, of course, to celebrate the company's 25th anniversary on NASDAQ.

23:29 And with that, let me turn the call back over to the operator for questions. Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. Our first question comes from Craig Irwin with Roth Capital Partners. Please go ahead. Good morning, and thanks for taking my questions. So Randy, Joe Bamford, CEO of Ride Bus, is a really good customer of yours, and he's out there talking about doing 3,000 fuel cell buses over the next few years.

24:28 It seems like there's pretty good regulatory support in the UK, and they're trying to work out the funding for that, although it is apparently in their stimulus. Can you maybe just help us with a little visibility on the potential tempo of orders if we do see the funding materialize as expected? And are there many other customers like this that have aggressive programs that to serve the European opportunity. Craig, good morning and thanks for the question and you're right. Joe Bamford has been a great customer for us and a great friend in fact. He's very active in the UK market agitating to have zero emission buses, not just 3,000, potentially up to 5,000 zero emission buses over the next number of years and looking for a pretty significant portion to be fuel cell buses and It's quite influential in that market.

25:29 One interesting thing about Joe is that not only does he own Wright Bus, but he also owns a company called Rise Hydrogen, which is providing hydrogen fueling station, including for an existing project with Transport for London. So Joe is quite active in that market. It's a local producer, manufacturer of buses. It has very good market share in that market. In terms of the cadence of orders, I think it's a little too early to comment on that. We're pretty excited about what we're seeing in their sales pipeline with different cities in the UK as well as in Europe generally. They're quite active now looking at other opportunities in Europe. To the second part of your question, of course, RightBus is a great leader in this market, but there are others as well.

26:16 And so you're seeing Solaris is very actively bidding in a number of key countries. on mainland Europe, and you've got Van Hoole as well, who's been very active for a long period of time, continuing to look at opportunities for fuel cell buses and have launched some very good projects with very good products. So I think we're going to see a significant uptick in Europe as well as the UK over the next couple of years. When we look at the growth that I mentioned earlier in our sales pipeline, a very significant portion is coming from the bus market, and we're showing a strong contribution from Europe, I would suggest, over the next 12 to 36 months.

27:03 Thank you for that. So the next question I wanted to ask is about the China market. So thank you for the update on the infrastructure in China. I know that that's very important because of the structure where people have to run the buses before they actually get the official release of funds. Can you maybe share with us where you think the discussions for regulatory support stand right now? I know there's a lot of optimism that this is going to be reinstated, but what do you think has to happen or what's the potential timing for clarity around that. Yeah, Craig, this is a very active discussion right now in China day to day. And I know there are a lot of players, a lot of different provinces and key centers that are positioning to secure support as demonstration regions in China. And so it's a very sensitive moment, I would suggest, in China right now on this front.

28:09 And I think we'll see clarity within the next 60 days. Excellent. That's a short timeline. I like that. Next question is Audi. So Audi did just trickle down a little bit this quarter. I guess we can call it Audi Volkswagen has been a very good customer for you on the services side. And if we track all the revenue and the capacity from the different contracts that they've announced, they really look like they're starting to bump up against the end of their capacity at this point. Many of us expected there to be a commercial endpoint for Audi Volkswagen. Are you potentially looking at a new phase of the relationship with Audi?

28:55 Do you expect similar services opportunity to recur maybe with Audi or another? And, you know, maybe will this shift into a different type of relationship where you might provide component or manufacturing support? Yeah, the plan, Craig, was for the Audi development program to complete next year. And certainly we continue to track to that plan. There has been some reduced scope this year. You know, Audi has had some budgets trimmed as a result of some of the financial distress in the overall markets for automotive, particularly in light of COVID-19. So we've been quite responsive to some of their requested changes. I think we're going to let Audi lead the communications on what their plans are for fuel cell passenger cars. More broadly, what I would say is not just Audi, but the passenger car OEMs generally, we've seen a very strong shift from many of these companies to also look at how they can leverage their technology for the commercial vehicle market.

30:02 And so that's something that I think increasingly we're seeing from the passenger car OEMs. and I think longer term, we're still quite bullish about the passenger car market, particularly when you look at vehicles that have high utilization. And when you start thinking about digital connected autonomous vehicles with more power demand just to support electronics on board, but are on shared mobility platforms and being used, say, 15 to 20 hours a day rather than our typical vehicle today of one hour a day. Utilization rates go up and the need for fast refueling and long range become important. So longer term, we're very excited about the passenger car market. That's an industry that is very challenged right now in 2020. And so I think there's still a lot of budgetary issues that we're seeing in the near term from those type of enterprises.

30:58 Great. And then last question, if I may, before I jump back in the queue. I appreciate the discussion about the $18.4 million in deferred revenue recognition from joint venture revenue. Can you maybe discuss the gating factors for us to see this revenue recognized for Ballard? And what is your current thinking about the tempo of release for that $18.4 million? Yeah, that's a great question, Craig. There are a number of gating factors there. One, of course, is to make sure that the products that are assembled at the JV are ready for the market. So that's really optimizing production and ramping through production.

31:45 Second is making sure that the vehicles that are being certified go through the right steps to make sure that customers have confidence. So even though we're talking about in the case of Zhongtong Bus, Asia Star Bus, and Sinotruck, companies that are within the Weichai Group, of course, we need to make sure that they're comfortable doing the testing, understand the safety protocols, understand operations. In some cases, these are new platforms, new customers, and so they're getting familiar with it. And so that's why we're pretty excited that there are 200 vehicles already on the road that are getting real-life experience and clocking kilometers, and the customers are getting comfortable.

32:30 Then there's other customers outside of the Weichai Group that are being introduced to the Weichai Ballard Joint Venture products as well, including, for example, Yutong, the world's largest bus OEM. And so it's just a matter of Weichai Ballard Joint Venture working with these end-market customers beyond the JV industry and making sure that they're ready to take those at the right time. The other aspect of this has been really getting the hydrogen fueling stations in place as well. And so, you know, there were four in Shandong right now. There's plans that I mentioned earlier to scale up the number of hydrogen refueling stations. That's going to be critical. But what I expect you'll see likely just in Shandong province alone is something in the range of of 14 or 15 cities that do fairly sizable bus demonstration projects in the next couple of years. And these initial orders will be the first part of that.

33:33 Yeah, Craig, it's Tony here, too, just to supplement Randy's comment. In terms of the timing, as Randy alluded to, there's a number of gating items that are including, of course, the fact that the joint venture is really only starting to become fully operational. but certainly we start we will start to see that 18.4 million dollars hit our books in the second half of the year and perhaps into the early 2021 which kind of ties a bit to Randy's comment about the typical back end of the year being a little hot stronger than the front end of the year this is this will be a contributing factor to why we're feeling a little bit more bullish on the back end as well. Okay and just just a point of clarification do we need to see positive outcome on the China regulatory side for that to be released in the fourth quarter?

34:21 Or is this expected to be released under most circumstances? Yeah, we do expect, of course, the policy to come out on the timeline. If it was deferred, I don't expect it to have an impact here on this revenue piece we're talking about, but it would have an impact on some order uptake later this year for the JV. Great. Thanks again for taking my questions. Congrats on the progress. Thank you, Craig. Our next question comes from Amit Dayal with HC Wainwright & Co. Please go ahead. Thank you. Good morning, everyone. I appreciate you taking my questions. With respect to the revenue split for 2020 between China and other markets, would it be possible to get some color on how that may shape up for 2020 and then going into 2021 as you ramp up in China, you know, how that picture may look like at the end of next year.

35:23 Yeah, sure. I mean, it's Tony here. So for 2020, this year, you know, China, and when I say China, I'm including here not only the power products, of course, the ongoing technology solutions program with Weichi, which is, of course, revenue, a good portion of our TS revenue, China this year will probably be somewhere in the order of 60% odd of our revenue this year, plus or minus for 2020. For 2021, we actually expect to see Europe start to become a larger portion of the total revenue contribution, and that's for two reasons. Number one is, as Randy was describing, we are starting to see some good momentum in the European bus market, and we do have a fair amount in our order book in our backlog related to Europe. And the other one is just with regard to China revenue, particularly, as you'll recall, the revenue that we're booking in Ballard related to Weichi will become MEA revenues. It's already now in the second half of the year, MEA revenue. So proportionately speaking, MEA revenue, while significant in volume, is a lower dollar value.

36:37 So that shift Next year, we'll start to, I think, ballpark even out and we would expect beyond 2021, Europe will become an even increasingly larger portion. It's Randy here. Thanks for the question. Just to supplement a few points. Our strategic objective is to have balanced revenue in our key geographic markets. So we characterize our key geographic markets as China, the European theater, and California. and, you know, going forward, if you look to kind of over the next five years, I'd expect to see a balance of about 40% of our revenue coming from China, about 40% coming from Europe, and about 20% coming from, you know, North America, but primarily California.

37:22 So that's the first point. And I think that the second point too that Tony mentioned is while the revenue from China at the Ballard level become somewhat constrained because we're selling MEAs rather than full systems. There's significant value creation occurring at our joint venture. And so we expect to see, of course, future value creation and value distributions, either dividends or cash distributions coming from the JV. And first we'll see EBITDA contribution, then we'll see cash distributions. And ultimately, we would expect to see that platform potentially to IPO and to see value creation there as well.

38:07 Understood, Randy. Yes, and that's how we've kind of modeled it out as well, you know, for our forward year projections. So good to hear this mix and the, you know, the diversification that you are starting to see already, which, you know, Looks good from this point right now. Yeah, I'll just add to that. The sales pipeline that I referenced earlier, a lot of that growth that we saw over the last few months is coming from the European market. Yeah, and it looks like last year the discussion was about China and all the policies over there, but in the last few months it looks like Europe is sort of superseding what China is doing. Well, what's interesting is that you've got, you know, very strong European policy, very strong policy in California, and we will see a new China policy.

39:01 So within this, you know, within the span of a relatively confined period, let's call it four or five months, you're likely to see all three of our key regions come out with strong supportive policy. Yeah, looks like it. So then when we look at the pipeline that's building against, you know, this environment, How should we think about that pipeline converting to orders and backlog? Maybe it's a little early now, but are there any catalysts that potentially move some of these from pipeline to orders quickly or will these take a little more time, I guess? Yeah, the type of projects we're typically involved in, the sales cycle, you know, it's a little protracted. It's not something that happens over a couple of week period. We've seen rare instances of that, but it's the exception, not the rule.

39:55 What I can say looking at the sales pipeline, it is very encouraging for 2021 and 2022 in terms of the growth rate that we'll see in the heavy-duty motor segment. Got it. You know, competition appears to be coming up to recent IPOs over here in the U.S. markets. You know, I'm reading about, you know, players emerging in China as well, both on the infrastructure side and maybe on the, you know, vehicle side as well. You know, your thoughts on how you are positioned relative to some of these players who are, you know, getting a little bit more press and, you know, promotion, etc. Yeah, this is something we want to spend a bit of time on in the September IR day is really clearly articulating the unique selling proposition that Ballard has and the very strong position we think we have from a competitive differentiation.

40:50 But one I'll just highlight here, two maybe, is just the real world road experience we have obviously with 50 million kilometers of vehicle experience on the road with Ballard technology inside, industry leading of course, and then the durability, actually having and many others. And so, you know, when you look at kind of the field experience, we have performance and durability in these heavy and medium duty motive applications. I think it's very compelling. And then, With respect to the JV, are there any additional investments that you need to be making into the plant? And at what point does this start operating on its own cash flows?

41:53 Yeah, so our cap, as you recall, we do have the requirement to make some additional capital contributions into the JV through next year. We made an additional capital contribution in the quarter. So we do have, I don't have the number right in front of me, I apologize, but You know, if it was in the neighborhood of 30 odd million left to contribute, that's the contractual capital contribution, which we will make, but we're not anticipating any additional cash requirements beyond what's already what's already included in our disclosure around the ongoing commitment. So, in that regard, we think, you know, with the JV starting to move up, you know, move more product sales, it will become cash flow break even in the, you know, and EBITDA contributing in the next couple of years.

42:43 So, that's, from our perspective, we expected, and Randy alluded to some dividends, which probably will come at the, you know, at the end of the five-year period, but Beyond those contractual equity commitments, no additional cash called. Thank you for that, Tony. That's all I have, guys. I really appreciate you taking the questions. Thank you so much. Thanks, Amit. Our next question comes from Rob Brown with Lake Street Capital Market. Please go ahead. Good morning. Good morning, Rob. I just want to dig in a little bit more to the sales pipeline. You talked about quoting larger size orders. Could you just kind of characterize what's happening in the marketplace and what kind of size order ranges are you seeing? Are these more real deployments moving from test deployments, or what are you seeing in the marketplace at this point?

43:35 Good morning, Rob, and thanks for the question. Yeah, I think there's a couple elements there. One is that I think there's a recognition that in order to drive down the cost of hydrogen, you need larger size deployments of buses and commercial trucks, even on the rail and marine side. So that you have higher demand for hydrogen and higher utilization of your fueling infrastructure costs. So I think that's been recognized. And so we're seeing larger projects to get better economics overall, including the hydrogen costs. And like you point out, we've been at this at Ballard for some time with demonstration projects, particularly in the US and Europe. And we're now seeing the next step of that. So rather than having 10 and 15 buses. It wasn't long ago where two to five buses was a typical deployment.

44:28 Now in the last few years that's scaled up to say 10 to 15. And now we're looking at hundreds of fuel cell buses going forward and thousands eventually for larger scale deployments. And when we've got 3,200 commercial trucks and buses operating in China, It's a very good data point that the numbers are starting to move north. The other thing that's really quite interesting outside of mobility is stationary is showing some significant pickup in interest as well with much larger opportunities on the stationary side as well. Okay, good. Thanks for the color. And then the China JV ramp in production, now that you're ramping, could you give us a sense of how How many units are kind of the plan of the ramp? And then maybe when you think you can start to see visibility on the cost down with volume ramp that you've sort of planned for, how do you see that playing out?

45:30 Yeah, I apologize. I'm going to have to ask you to be a little patient on this one. You know, WHI is, you know, would like to get ahead first on the communication side. And so we want to be respectful of that request. But certainly at the September IR day, we'll be able to provide more visibility on this front. Okay, good. Thank you. I'll turn it over. Thanks, Rob. Our next question comes from Michael Glenn with Raymond James. Please go ahead. Hey, good morning. Randy, can you just give some update in terms of medium and heavy duty truck market? Clearly, you have a strong alignment in China with a partner to grow in that market.

46:19 But as we think about Europe and North America, how should we think about your approach to that opportunity? Should we think about another JV with an incumbent OEM or other approaches that you're thinking about there? Yeah, Michael, thanks for the question. It's a really interesting time right now where you've got basically the large truck OEMs as well as all the tier one suppliers looking at this market very carefully. I think there's a recognition now with California and with Europe having very strong policy that requires zero emission and with batteries, in our view, not able to satisfy many of the use cases that fuel cells are really the only zero emission option longer term. And so we're seeing all these OEMs and tier one suppliers carefully studying and actually have accelerated their review of the fuel cell opportunity for commercial trucks.

47:19 So I think what you can expect is a very comprehensive relationship that Ballard will strike with a major name brand partner, particularly with strong European exposure. We're not in a position yet to comment more on that, but there's a lot of work that's been going on, you know, for the last six months on this front. We expect significant more work for the remainder of 2020, and we'd expect to be in a position later this year to provide, you know, some really good visibility on what I think is perhaps the most exciting part of our business plan going forward. Okay. No, that's very exciting. And then, clearly, you know, you've talked about Europe with respect to what's taking place with hydrogen. Can you speak to perhaps some of the specific strategies in place at Ballard to ensure that you receive your fair share of these opportunities?

48:16 And how should we think about the competitive environment over there? We've seen a number of other companies step in with some capital deployments towards fuel cell development. How should we think about the competitive environment with these customers as well? Sure. We're really looking at opportunities to increase our presence in Europe. On the fuel cell side, we do have obviously an existing facility in Hobro, Denmark. We have our Marine Center of Excellence that will be commissioned in the coming months. And a lot of activity in the marine market, by the way. and I think that that market will surprise to the upside.

49:01 I think, you know, as you look at our M&A strategy particularly, we're quite active looking at M&A opportunities and a number of them are in the European market. I think this will help strengthen our European positioning. And then, you know, you just kind of look at the deployments and the market share. We're probably somewhere around 85% market share for fuel cell buses that have been deployed and we're also looking at collaboration and consortium models. So you've seen what we announced last year with the H2 Bus Europe Consortium, what we brought together, you know, really leading players, including Nel on the hydrogen fueling side and electrolysis side, including Rise, as I mentioned earlier from Joe Bamford, and including on the tank side, Hexagon, and, you know, Right Bus, obviously, with the buses.

49:54 bringing together a consortium to lean forward on volumes, lean forward on the cost structure, and to drive to about a €375,000 fuel cell bus cost with a €5 per kilogram of green hydrogen delivered to the vehicle and maintenance costs of about €0.30 per kilometer, which is one we continue to work to drive down. So there are a number of different ways we're approaching this. I think coming back to your initial question, Michael, about the truck market and the collaboration we're looking at in Europe with a key player for the commercial truck market tied with our own physical presence and capabilities in Europe, looking to strengthen that and grow our European business as well as through M&A plus consortium models.

50:43 We're working on all three of these parallel. Okay. As we think about specifically to the competitive environment, there's been some larger entities. They've significantly increased their capital deployment to fuel cell development. Are there ways that we can think about benchmarking what you have in terms of a product versus what they have in development or they're bringing to market? Yeah, I think when you look at most of the companies that are looking to bring Thank you very much. understanding what balance of plant components are required to match up with the stacks, and then optimizing your control strategy at the module level as well.

51:52 I don't think there's any doubt in the market that we are the leader on durability for these heavy-duty motive markets. And so if you kind of look at the technology and product offerings for others, one of the key questions I would ask is, you know, what durability has been proven. And, you know, they're going to need to invest, as you point out, significant capital over the number of years while we continue to improve to our next generation. Okay. Thanks for the info. I'll go jump in. Thank you. Great. Thanks, Michael. Our next question comes from Rupert Mayer with National Bank. Please go ahead. Good morning, everyone.

52:38 Given one of your previous answers, you may defer this question to later, but looking at the JV in China, how long do you think it'll be before you might lean on that JV for product to sell outside of the Chinese market? Rupert, thanks for the question. Great question. You know, I think one of the really kind of constructive things we did and how we structured Our arrangements with the Weichai Ballard joint venture was to have that optionality. So the JV is exclusive, exclusive platform, both for Weichai and Ballard for bus, truck and forklifts in the China market. But Ballard has exclusive rights to purchase those products outside of China. And what that means is as we're looking at scaling in Europe and scaling in North America and other markets, we're seeing, for example, India becoming very active.

53:33 As we're seeing these markets scale, we have the ability to manufacture in region or continue manufacturing in Vancouver if we choose. But we also have the optionality of sourcing from the JV. And as we'll describe in September, the JV has significant production capacity expansion capabilities as well. So I think it provides us a lot of optionality. I think we'll have that optionality as soon as 2021. I think it'll be a function of how are we satisfying the market requirements in those specific markets, what's the most cost-effective way, and what is the market looking for? We do see some instances, of course, where markets are becoming much more insular and looking for more locally produced product.

54:22 Rupert, Tony here, Miffy, just to supplement what you were driving to in Radicon, certainly we have the right to buy finished product, of course, from the joint venture for the rest of the world. You know, beyond that, though, we also are benefiting substantially from supply chain. The joint venture, our joint venture in China has qualified a number of low cost balance of plant. Recalling that the balance of plant in a module is probably 60 to 70% of the total cost of a module. So even if we're not going to be quote unquote buying modules from the joint venture, we are benefiting already from new supply chain. That's driving down our current balance of plant costs that we're actually using in our current product today for the rest of the world.

55:09 It's really a combination of not just the full product, but also supply chain. And we'll probably have, again, back to, not to punt too far, but we'll be getting into, particularly getting into that balance of plant costs down in September. And we'll give you some more concrete examples, but we're seeing that benefit already. Yeah, there's been very strong progress. It's been unbelievable how quickly, you know, things operate in China, particularly with the Weichai supply chain muscle. And so the conversion of some of our Balance of Plant Components over to China-sourced materials at significantly lower costs while still maintaining quality has been a key deliverable and a lot of progress made so far in 2020 on that. So it also means we're getting the advantage of the scale that comes from the China market being applied on those Balance of Plant Components to these other markets as well.

56:02 I may be asking for a bit of a preview here and feel free to defer this question as well, but if you look at where your costs are today and where they need to be in the future. What's your sense of how much of the cost out will come with supply chain and scale versus how much work needs to be done on the R&D side? Yeah, so what we'll show in September is about a 70% cost reduction, Rupert, at the stack level and about a 70% cost reduction at the module level. and we'll allocate what portion of that comes from design engineering changes versus supply chain versus volume assumptions. And the volume assumptions will be tied out with our business and plan.

56:48 These won't be unreasonable volume assumptions. In aggregate, they roll up to about a 70% cost reduction. What's really interesting is on the stack side, we call it our three by three program, on the stack side, we're very well advanced and I would say, you know, probably 80, 90% of that cost reduction is highly probable at this stage with very low development risk. Great. Thanks for the call and I'll get back in the queue. Thanks, Rupert. Our next question comes from Aaron McNeil with TD Securities. Please go ahead. Hey, morning all. Thanks for taking my question.

57:33 Randy, you mentioned the strong line of sight in Europe over the next few years. I think Tony mentioned earlier that this is partially due to projects already in the backlog. So I guess I'm wondering, you know, from a backlog perspective, how we think that European opportunity will play out. And do you expect that COVID will have a lingering impact on the trajectory of your overall backlog over the coming quarters? Or do you see an inflection point now that things have somewhat stabilized? Yeah, good question, Aaron. Thanks for the question. I think we'll likely see, you know, some of the COVID challenges we've seen, including with some of the European customers, likely clear in 2020 with that cloudiness disappearing by the end of the year and much more clarity in 2021.

58:23 What I would say is that if you look at the cadence or the sequence of growth in the European market, the bus market will be first. The commercial truck market, you're going to see very strong progress from Ballard in the commercial truck market in Europe over the next 6 to 12 months. The rail market is going to start to contribute, and we're seeing a lot of quoting activities from our partner in the rail market in Europe. And then marine will come subsequently as well. So what we'll see is a scaffolding effect where you see the growing bus market. You add on trucks. Both those markets are growing. You add on rail. All three of those markets are growing, and you add on marine. So we see a very strong scaffolding effect of these four markets where we have the same core competencies, the same technology, and in some cases, the same products leveraged across these heavy-duty motive applications.

59:18 And I think we'll see that scaffolding appear most prominently in Europe first. with China and North America having a similar scaffolding effect subsequently. I'll just supplement as well. Again, Randy alluded to the pipeline and the record pipeline. Historically, and to be completely transparent, we haven't talked a lot about our pipeline in the past. We've generally focused in on the 12-month order book. and the backlog, which is the committed orders for delivery. So we talked about 100 million odd, 12 month order book, 155 backlog. I think what we're getting to here is an opportunity to provide some more transparency on that pipeline because Brandy alluded to some markets like the marine market and rail market and even the distributed generation stationary power. There's an awful lot coming into our pipeline that actually speaks to some of the scaffolding.

1:00:19 So we're kind of thinking about how best to describe that. I suspect in September will provide a bit more transparency on the pipeline, including that scaffolding effect of revenue over the next number of years. It's a growing, increasingly growing market. I mean, historically for us, of course, it's been bus order, bus order, bus order, we throw in the wage hire, but it's really diversifying both geographically and by market. And as I said, we have not really delved into that much in the past, but we will certainly going forward. Okay, I'm not going to try to pin you down on what quarter you think it's going to be, but presumably you're soft guiding to some sort of inflection point in the backlog at some point in the near term. Is that a fair characterization?

1:01:10 Yeah, I mean, I think what we've indicated recently is that we're likely to see, you know, relatively strong growth rates over the next few years, you know, 30, 40% in that range. and then as you get closer to the 2024 requirements in California, 2025 requirements in Europe, there's a lot of work that needs to occur with not just us but partners and hydrogen refueling infrastructure to support that. You will see a very steep curve from 2023 onwards and that will occur in Europe and in California at the same time when China probably has scale at that point as well. So our costs and our ability to rest those markets even more capably from a cost side will be very helped, I think, from the scaling effect we're going to see earlier in China.

1:02:01 Okay. And then moving on to the JV side, I know you mentioned the smaller dollars, but can you remind us if the MEAs that relate to the 2,000 unit commitment from Weichai are already included in the backlog? and what the timeline for WHAI-related backlog additions might look like, if they're not, over the coming quarters. And I guess I'm just trying to get a sense of how the 2,000-unit commitment might impact your backlog over the coming quarters. Sure. So just to speak specifically, so we did, there's really, let's focus in on the 2,000-unit order. As you may recall, we shipped 500-odd parts kits over the course of last year, early this year. That would have been in you know, first satisfaction of the 2000.

1:02:49 We also then announced the $19.2 million MEA order last December that we've started shipping and will be shipping. So between that $44 million order, the $19 million order, It starts to account for a good portion of that 2,000 units. There's probably a little bit more MEAs to fully satisfy it. So it's safe to say it's either in the revenue or that revenue to be recognized, I mentioned earlier, and some incremental MEAs yet to be shipped. I think what I'd watch for beyond that, of course, is expecting You know, we anticipate getting another order for MEAs probably later this year for 2021. That will be the next significant order to Ballard related to the sort of incremental and above the 2000 odd.

1:03:41 Okay, great. That's great, Keller. And then finally for me, and this is just a point of clarification, did I hear correctly that you are working towards transitioning the JV into a separate public entity? If that's incorrect, that's fine. But maybe you could clarify what the longer term ownership plan is for the JV. Yeah, so I think Wei Chai has a history of doing this where they have investments in companies in China that they then take a portion of that company public. And so certainly that's something that Wei Chai and Ballard had contemplated upfront when we put together this joint venture. There are, you know, some, some fuel cell companies that have gone public, you know, Iwatong or Sinohitech, as it's referred to, went public this year. In China, ReFire is likely to go public as well.

1:04:32 So I think it will be a very attractive IPO market for a number of years for hydrogen and fuel cell related technologies in China. When you have Weichai behind, you know, an IPO, it's a different a different credibility factor, I would suggest, than some of the others. And so, yeah, that is a longer-term plan to unlock value that I don't think is currently expressed in the current valid valuation. Okay, understood. Thanks for answering my questions. I'll turn it over. The next question comes from Mac Whale with Cormark. Please go ahead. Hi, good morning or good afternoon now here on the East Coast.

1:05:17 In terms of timing on a follow-up order, you kind of alluded to that in getting some MEA orders for the next 2000, but presumably once you start to optimize the ramp up at the JV, you would want to see month over month an increase in production and shipment. So can you speak a bit to Visibility beyond the 2000 units and what sort of a production ramp would look like in terms of just targeting and going forward? Yeah, Mac, I think, you know, the 2000 units really aren't dependent on the announcement of the China, new China policy, whereas orders beyond that are.

1:06:04 And so, you know, we want to make sure that when I say they're dependent, you know, the volume is going to be dependent on how the policy shakes out, you know, which jurisdictions, what the requirements are. So I think we need to wait for that before we can kind of forecast what 2020 will look like in terms of the JV moving units and what that means for MEA sales. But I think, you know, kind of use that 2000 as a baseload level. We expect, of course, to see a growing number each year. just looking only at Shandong Province requirements as an illustrative example, you know, there needs to be a scaling effect. Okay. And presumably because you have these different initiatives underway and discussions ongoing that the potential buyers will be relatively ready to go after an announcement is made about the policy.

1:06:58 What's the sort of lag in policy to orders that you expect? Yeah, I think most of the end market, you know, the vehicle OEMs outside of the wage high group are quite active now looking at the technology. And so, you know, hopefully we'll see a number of them get platforms tested and certified, added to the MIT list so that that lag factor is shorter. Historically, it's usually taken about six months in some cases for those platforms to get registered, but the time is getting more compressed. So perhaps that will be as gating as it was a number of years ago when it first was introduced.

1:07:46 But just generally speaking, I would expect that we would forecast seeing an order from the JV in late 2020. that will set the stage for 2021 MEA supply, and we'd expect to see some scaling. Okay. Great. Thanks. The rest of my questions are sort of technical modeling questions. I'll take them offline later this afternoon. Thanks, guys. Great. Thanks, Mac. Our next question comes from Anne Margaret Crow with Edison. Please go ahead. Good afternoon, gentlemen. Thanks for taking my call. And it's really good to see the progress that's being made within the fuel cell market, and particularly at Ballard.

1:08:40 I wanted to just explore a little bit more what was happening in China. And the first thing was, how does your work with Weiche It was good to see that you had got an order recently from the Synergy Group. Did you expect to get the 150 million minimum revenues from them by the end of 2021? Yeah, so, and Margaret, thanks for the question. So, first on Weichai's strategy and the relationship with Ceres.

1:09:28 You know, I think Weichai is very interested in having optionality on other fuel cell technologies and is, you know, looking at Ceres and obviously has an investment in Ceres and looking at commercial collaboration with a joint venture in China with Ceres. I think the primary market that they're looking at is likely and more stationary applications. There is a thesis that perhaps solid oxide fuel cells may be able to satisfy onboard power generation for vehicles. I think most people have discounted solid oxide for that. If anyone's going to be able to do it, it's likely going to be series, but I think there's a pretty tough putt for solid oxide fuel cell technology to get there in my opinion.

1:10:18 as some context, the former CTO of Weichai had a prior history at Eaton where he developed some solid oxide fuel cell technology and has a real affinity for that technology. So that was part of the history of that relationship as well. So I think it's a very good relationship between Ceres and Weichai. Ceres is a very credible company. I think they're doing an outstanding job on their commercial collaboration front, their technology development and strong balance sheet. I've got a lot of respect for the CEO at Ceres as well. On the Synergy Group front, of course, we were delighted to get the follow-on order, which was something we had the size of that follow-on order was bang on with what we expected and what they committed to do last year for 2020. So that was very encouraging to see them come through with their commitment.

1:11:14 In terms of future orders, we'll have to see how that market plays out, particularly, again, with the China policy coming out in the next, say, 60 to 90 days, how that Synergy Ballard JV stack technology meets the market requirements. So I think we'll have to wait on that. In terms of the aggregate value of the Synergy JV and revenue stream going forward, I think what we've seen in 2020, as I said, is consistent with what was agreed to last year. There's no further kind of firm take or pay commitments at this point. Okay, that's very helpful. Thank you very much. This concludes the question and answer session.

1:12:03 I would like to turn the conference back over to Randy McEwen, the CEO, for any closing remarks. Thank you for joining us today and we look forward to speaking with you again on September 29th during our Investor and Analyst Day 2020 and subsequently in November when we'll discuss results for Q3. Thanks again. This concludes today's conference call. You may disconnect your lines. Thank you for participating.